DETROIT'S comeback scales new heights

Long-awaited building blocks in the City's downtown development - events propelled by General Motors Corp.'s decision to establish a new world headquarters in the riverfront Renaissance Center - are being set in real-world stone.

Two temporary casinos - and temporary these days means as much as a $100 million investment - are up and running and reporting excellent takes.

The new Detroit Tigers baseball stadium has won rave reviews for its thoughtful blend of baseball tradition and family fun, intelligent urban design and great views of the city's skyline.

And soon, Farmington Hills, Mich.-based Compuware will break ground on its new Campus Martius world headquarters, expected to house 3,000 employees in its first phase. Even the former Hudson's building is chipping in, as its implosion left a ready-dug site for a 1,000-plus capacity underground garage.

In the burbs, all is well. As the new housing market and automobile industry remain strong, rational balances of supply and demand prevail in most property types and submarkets.

While residential developments continue to spiral farther out from the central city, more mature communities like Dearborn, Southfield or Livonia report progress in mixed-use developments that will augment housing stock and offer a distinct retail and entertainment experience.

"There's at least one more good year here, although I would be a bit more cautious toward the end of 2000," says Larry Hadley, president of Larry Hadley & Associates in Novi, Mich. Hadley's comments reflect the sentiments of many.

"Car sales and housing continue to do well; inflation is at bay; interest rates are still tolerable; and the deals still work," continues Hadley. "We've had the most new construction in office, so supply might start to catch up with demand a bit there. Rental rates will have to flatten out a bit, since there is enough product on the boards."

David Littman, chief economist with Detroit-based Comerica, says there is "no end in sight for car sales. This is the seventh consecutive profitable year for automakers. Sales should be even higher than last year."

But amidst some Michigan euphoria, Littman offers some sobering information. "Our state remains remarkably behind others in per capita personal income. We have not achieved pre-eminence, even in the best of cycles for automotive, when it comes to population growth and employment growth."

Adds Littman, "Michigan is also sluggish compared with the national average, and especially compared with rapidly growing states like Florida, Texas and California." Littman attributes much of this situation to the state's tax and regulatory burdens. One impact is young people leaving the city: "We are continuing to lose lots of our youth."

Downtown rebound The Farbman Group of Southfield, Mich., is among those real estate companies looking at Detroit's big picture. In particular, David Farbman, president and COO of The Farbman Group, has been active in residential conversions and renovations, including:

* The 1997 conversion of Indian Village Manor luxury apartments to condominiums, resulting in 90 units at the seven-story building, priced from $180,000 to $300,000. "At the time, it was the first condo conversion in 24 years," says Farbman.

* An update of the 70-unit Garden Court Apartments at Jefferson and Joseph Campau, designed by Albert Kahn, Farbman's great, great uncle.

* Development of the last vacant warehouse at Stroh River Place, east of the Ren Cen, into 200 River Place Lofts that includes 50 high-end condominium lofts. The units, which Farbman says were all reserved within 10 days of their announcement and will soon be ready for occupancy, feature exposed cherry wood beams, interior brick, maple floors, slate kitchens and baths, and Whirlpool spas.

* Conversion of a former department store adjacent to Campus Martius into the Lofts at Woodward Center, which will feature 60 high-end rental lofts, about 1,000 sq. ft. each, and 14,000 sq. ft. of retail space.

* Fifty "affordable luxury" condominiums priced from $60,000 to $90,000 at Greymont Center, an Albert Kahn-designed building located on Seward Avenue in the New Center area. "My passion is to go in and restore historic buildings," says Farbman.

* The Farbman Group also is a partner in the Clark Street Technology Park in southwest Detroit. The project is a conversion of a former Cadillac production plant.

Already, 800,000 sq. ft. of new construction houses firms such as Federal Express, Walbro and Piston Packaging. Farbman says the site could eventually support about 2.2 million sq. ft. of development. Existing and potential tenants include logistics, import-export and light manufacturing firms.

The Farbman Group is also the managing and leasing agent for CBD's First National and Penobscot buildings, the latter being one of Detroit's most recognizable and well-known landmarks.

John Keba, vice president of asset management for San Diego-based Capstone Advisors, the owner of the two buildings, says that more than $10 million is being invested in mechanical, HVAC, electrical and elevator upgrades.

The Penobscot Building already houses control centers for three separate fiber optic rings that exist in downtown Detroit.

The First National Building, with about 800,000 sq. ft. of leasable space, is 85% occupied, at an asking rate of $16.50 per square foot to $18.50 per square foot. The Penobscot, whose tenants include Legal Aid Defenders and the Third Circuit Court of Michigan, is 75% occupied, at an asking rate of $14.50 per square foot to $18.50 per square foot, a figure Keba expects to grow to 85% to 90% by the end of 2000.

"The Penobscot was built as the leader in the industrial age; it is now being transformed to be a leader in the technological age," says Keba.

The Detroit rebirth was led by GM's commitment to a Ren Cen home, prestigious projects like the Detroit Tigers' Comerica Park, the Michigan Opera Theatre, the casinos and the soon-to-be new Detroit Lions stadium, as well as efforts of individual entrepreneurs. Farbman also credits Detroit Mayor Dennis Archer and his administration for pursuing new investments in the city of Detroit.

"Enough substantial projects have already taken place to create a huge buzz with Generation-Xers," adds Farbman. "There's a huge group of Generation-Xers that want to move to the city. I'm an X-er and in touch with that."

Doug Krieger, office broker in the Southfield office of Los Angeles-based CB Richard Ellis, says that the vacancy rate for Class-A office product in the CBD is 4.8% compared with a 24% vacancy rate for Class-B properties. However, Krieger notes that "well-positioned B+ buildings are continuing to be the beneficiary of the strong Class-A market.

Krieger also credits GM and Compuware with changing the character of downtown in a positive way. "Compuware should attract the type of employees who will be willing to live downtown - the creative, entrepreneurial types," says Krieger.

Thus, a second business anchor to the New Downtown, after GM, will be Compuware Corp.'s new Campus Martius headquarters. Ground will be broken soon on Phase one of Compuware's headquarters, a 16-story, nearly 1.1 million sq. ft. facility.

The $400 million investment is expected to be completed by summer 2002 and house as many as 3,000 employees. A projected Phase two would add another 300,000 sq. ft. to 400,000 sq. ft. and accommodate another 2,000 employees.

At the same time, Compuware has planned a 600,000 sq. ft. River East Building on riverfront property held by GM. This facility would house Compuware subsidiaries like Care-tech, which delivers information technology for the healthcare industry, as well as GM and Compuware-shared facilities such as a wellness center, day care center and cafeteria.

Presently, Compuware has 16,000 global employees and 6,500 employees in Michigan. The move from the firm's existing Farmington Hills headquarters is expected to be supported by State of Michigan property tax credits that could total $70 million over 15 years, according to Gail Lopez, real estate manager for Compuware. Detroit's City Council has already approved tax-increment financing for the development, if the state tax credits aren't forthcoming.

"We believe that the new headquarters will help with the core of the city from a real estate perspective. We hope it will encourage other companies to come downtown," says Lopez.

Suburban office The Detroit office of Northbrook, Ill-based Grubb & Ellis reports 91% occupancy for the 60.2 million sq. ft. of office space tracked in the suburban, CBD and New Center areas. The weighted rental rate for these properties was $23.99 per square foot. Occupancy for the 9.8 million square foot tracked in the CBD was 79.5%, at a weighted average rate of $22.51 per square foot.

Of individual submarkets, Southfield, the largest suburban submarket, with 15.5 million sq. ft., reported 93.7% occupancy, at a weighted rental rate of $22.81; and Troy, the second largest suburban submarket, with 11.8 million sq. ft., reported 94% occupancy at a weighted rental of $26.34. This demonstrates for Troy perhaps a high watermark of recent times.

Suburban submarkets with the greatest vacancy rates, according to Grubb & Ellis, include Livonia, with 12.7% vacancy among 2.9 million sq. ft.; and Novi, with 13.7% vacancy among 924,000 sq. ft.

Among suburban office submarkets, Troy and the Interstate 75 corridor into Auburn Hills continues to be an important growth marketplace. This corridor includes DaimlerChrysler's North American headquarters and Oakland University.

Mike Moran, principal at the Bingham Farms, Mich.-based office of Colliers International, reports that Wellington Green will see its first tenants take occupancy this month. The project is a development of Bingham Farms-based Beachum & Roeser.

The property, on University Drive, just east of I-75, has an asking rate of $24 gross plus electric and has signed leases or firm commitments for 60,000 sq. ft. The 30-acre site can accommodate as much as another 165,000 sq. ft. of office space, most likely for smaller signature buildings, says Moran.

Moran also notes that a distinct North Troy office submarket - the Northfield area centered about Crooks, Long Lake Road, Corporate Drive and Investment Drive - has quickly matured over the past two to three years.

Properties now complete include Troy Corporate Center, a development of Bloomfield Hills-based Kojaian Cos.; Northfield Point, a development of Southfield-based Etkin Equities; and two buildings by the Pauls Corp., a Denver-based real estate developer; as well as a new headquarters under way for Flagstar Bank. Moran adds that DTE Energy and Chrysler Financial have also completed build-to-suits in the area.

David Miller, principal and office broker for Southfield-based Signature Associates-ONCOR International, reports that the Pauls Corp.'s 107,000 sq. ft. Northfield Crossing, at 1441 West Long Lake Road, has been leased to Delphi Automotive Systems, formerly a division of GM, because the company outgrew its nearby technical center at Crooks and I-75.

North of Detroit, Burton-Share and Katzman of Bingham Farms is concluding its Five Pointes mixed-use development at the gateway to Oakland University, that includes or will include a Homestead Village hotel, an Embassy Suites hotel, four restaurants and a 55,000 sq. ft. medical office building.

Additionally, partner Peter Burton reports that the firm completed its purchase of the Pinnacle property, near I-75 at Harmon and Giddings Roads. About 22 acres of the 60-acre property, which has been leased to several automotive suppliers, remain open for development.

At Burton-Share and Katzman's Executive Hills, groundbreaking will take place for a new 100,000 sq. ft. headquarters facility for New Venture Gear, a partnership between GM and DaimlerChrysler, a company that makes engines and transmissions. Burton says plans call for a 28,000 sq. ft. office building in Executive Hills.

Move south, in Troy's traditional CBD, Moran reports that the 250,000 sq. ft., 13-story Columbia II will be ready for occupancy this month. The property, at an asking rate of $26.50 gross plus electric, is already 83% committed, says Moran. Tenants will include law firms Cox, Hodgman & Giarmarco and Butzel-Long.

"This pretty much maxes out the Golden Corridor," notes Moran. Among new office properties built by the Kojaian Cos., the firm reports 100% occupancy at Northeast Corporate Center in Ann Arbor; 75% occupancy at Victor Corporate Center in Livonia; 100% occupancy at Troy Corporate Center; and 65% occupancy at Orchards Corporate Center in Farmington Hills.

Other developments in progress by Kojaian include:

* Interchange West Business Center in Van Buren Township, an industrial warehouse development with two 345,000 sq. ft. facilities under construction, one of which is already 100% leased;

* Northville Technology Park, 89 acres located at the northwest corner of Beck and Five Mile roads in Northville Township;

* Alpha Tech Park in Wixom, where four 48,000 sq. ft. buildings and a 40,000 sq. ft. building are planned.

With respect to today's strong suburban rental rates, Miller says that rates were artificially low for years. "We've now just exceeding the rental rates of the mid-1980s," he says. The build-out allowances on new office product are boosting absorption rates, adds Miller. In contrast, landlords of existing properties are offering limited-tenant improvement allowances.

On the near-west side, continued development of high-tech space in communities like Novi, Farmington Hills and Wixom, the latter more characterized by its light industrial properties, may also provide a reservoir for office-type users.

Novi, in particular, made a decision to increase non-residential land use through rezoning of about 1,000 acres. The new office service technology (OST) classification allows for R&D, high-tech, clean industrial facilities and related office uses, says John Fricke, a broker with Signature Associates. Properties within this zone include Burton-Share and Katzman's 33-acre Meadowbrook Corporate Park.

Kevin Hegg, managing director of Cushman & Wakefield of Michigan, notes that the national realignment and consolidation of REITs has benefited those investors who have chosen to concentrate on the Detroit market. Examples cited by Hegg include First Industrial Realty Trust of Chicago; Liberty Property Trust of Malvern, Pa.; Ashley Capital of New York; and Kojaian.

No sticker shock, yet Suburban Detroit office properties continue to appeal to investors, says Joe Anthony, director of investment sales in the Southfield office of CB Richard Ellis. In 1999, there were 34 properties that closed, representing 6.5 million sq. ft. and an aggregate sales price of $715 million, for an average sales price of $108 per square foot, says Anthony. That's a significant increase over 1998 when 25 properties traded at an aggregate sales price of $89 per square foot.

Anthony projects nearly another 2 million sq. ft. closing in the first half of 2000 and perhaps 4 million sq. ft. total for 2000. "In the past two years we've had a 25% turnover of inventory. This would still be a great year for Detroit," notes Anthony.

Anthony expects investors to be active in Detroit unless interest rates escalate noticeably. "The flip side of interest rates is that performance at the property level has been outstanding," says Anthony. "The limited effect of interest rates increases has been more than offset by profitability at the property level."

Of the 500 million sq. ft. of metro Detroit industrial space charted by Grubb & Ellis, in the fourth quarter of 1999, the firm reported overall availability of 30.4 million sq. ft., or 6.09%. The asking rate for warehouse, distribution and general industrial space was $4.71 per square foot, and for R&D/flex space, $8.25 per square foot.

The report also notes the rehabilitation of older manufacturing plants, including the former Warren Tank Plant in Warren by Crudo Equities Inc. of Livonia and the former Peregrine Manufacturing facility in Livonia by Ashley Capital.

Susan Harvey, vice president of Ashley Capital, reports that of four buildings totaling 2 million sq. ft. planned for the 120-acre Livonia Corporate Center at Millennium Park (Middlebelt and I-96), the buildings with 750,000 square foot and 325,000 square foot are now complete.

Camarillo, Calif.-based Technicolor, a visual media company, will be a tenant at the park and will consolidate some of its other metro Detroit offices into 700,000 sq. ft. of space. The asking rate at Livonia Corporate Center is $5.25 per square foot, triple net.

"There was a need in Livonia for large blocks of space," says Harvey. "This was an opportunity for us to assemble a large enough parcel to do an Ashley Capital-type product."

At Plymouth Road Technical Center Ashley is literally raising the roof, increasing the clear-height over half the 1.1 million sq. ft. building from 15 feet to 30 feet.

St. Louis-based Clayco Construction's Livonia office is participating in several new projects, including a 362,000 sq. ft. warehouse for Budco in Highland Park; a 312,000 sq. ft. facility in Romulus, to be developed by Dallas-based Trammell Crow Co.; and new office construction in Troy.

Randy DeRuiter, regional vice president of Clayco, says that Detroit remains an attractive market for national investors due to a well-educated work force and strength in automotive-related R&D.

Among established developers, The DeMattia Group is demonstrating a geographic diversity, including outside its Plymouth area stronghold, as well as a diversity of product types beyond its bread-and-butter light industrial/high-tech form.

The firm's 80,000 sq. ft. Victor Park West, in Livonia's Victor Corporate Park, is 60% leased, according to Gary Roberts, executive vice president of development for DeMattia. DeMattia will continue to explore office product in newer communities, Roberts says, citing, as an example a 75,000 sq. ft. build-to-suit it completed for NBD in Grand Blanc, Mich., a year ago.

At Michigan Industrial Park, about 35 acres of the 144- acre park is still available for development. "Outsourcing is growing strongly in automotive manufacturing, and we are continually responding to new requirements," explains Roberts.

"E-commerce will create opportunities in the distribution market, where we've had some preliminary discussion with an Internet grocer," adds Roberts.

DeMattia is proceeding with site-plan approval for a three-story, 127,000 sq. ft. Hills Corporate Center at M-59 and Adams Road in Rochester Hills. The development is expected to accommodate technology companies drawn to Oakland County's Automation Alley where DaimlerChrysler holds center court.

Retail and residential intertwined Both high- and low-end merchants are challenged by stiff competition and a studious, take-no-excuses consumer. First it was catalogs and catalog stores. Now, it's Internet buying, which, ironically, may lead consumers back to stores that combine look-feel-and-smell retail with the ability to access greater inventories electronically.

"Clicks and bricks seems to be excelling better than those with pure bricks or pure Internet," notes Bennett Terebelo, executive vice president with Southfield, Mich.-based LaKritz-Weber.

Regardless, most retail forms do well in metro Detroit, from Target and Wal-Mart to high-end or high-entertainment, thanks to what seems like a never-ending residential grid, according to Terebelo.

"Some 72% of the population lives in single-family dwellings, and nationally, while Americans move every four to six years, there are longer stays in homes here," says Terebelo. "More money is invested in the home, so Detroit is home improvement heaven. Overall, the retail market is still on fire here, as long as residential construction continues."

One concern Terebelo has is that there seems to be less and less [different] retailers to compete. "Those still operating are doing well, but fewer new retailers are being invented, which is scary," he says

While smaller, traditional downtowns like those in Plymouth, Ferndale or Royal Oak have been spruced up, street-level arteries present challenges to retailers, developers and community officials. Examples include Plymouth Road, Woodward Avenue, Telegraph Road, Michigan Avenue, Grand River Avenue and Gratiot.

Issues include assembling land, finding the right merchants for re-leasing, and taking a correct pulse of the immediate community.

Dearborn economic development officials are working to establish West Village and East Village gateway identities to improve the physical environment by developing tenant synergies and standards similar to the best community or regional malls.

In the West Village, well-received condos with accompanying retail have been built by Phoenix Land Development Co. of Farmington Hills, Mich. The city and community focus groups are now considering proposals for redevelopment of the vacated 84,500 sq. ft. Jacobson's building and 26,000 sq. ft. Jacobson's Home Store, a former Crowley's site, and improved tenancy at nearby Westborn Mall.

One mixed-use proposal by Burton-Share and Katzman calls for townhouses, retail, 60,000 sq. ft. to 120,000 sq. ft. of office, and a 100-room hotel. "A mixed-use development in an urban location helps generate electricity that brings life to the community," says Burton.

Toward the east, the city is considering eight proposals for the former Chicago Road House site, which could serve as the gateway to downtown Dearborn and also possibly a link to the University of Michigan-Dearborn campus and Henry Ford Community College to the north.

Also on the way for Dearborn's East Village are 156 new housing units, coffee shops and cafes, antique shops, artists' galleries, and studio space.

In Livonia, along Plymouth Road similar challenges apply, although the area lacks Dearborn's outstanding draws such as Fairlane Town Center, the Ford Motor Co. world headquarters, Henry Ford Museum and Greenfield Village.

"This is our oldest commercial corridor, established in township days, before modern-day setback requirements, plus in many cases there is inadequate or no parking," says John Nagy, director of the Plymouth Road Development Authority.

The Authority, organized under Michigan's Downtown Development Authority (DDA) Act in 1996, has created a tax-increment financing district. While business compliance is voluntary, the authority has concentrated on improving streetside infrastructure, including curb and street repair; promotions; greater police patrol and building inspections by the City; and selected grants to area businesses.

One long-time stumbling block to an improved commercial and community environment may soon be cleared. Phoenix Land Development is redeveloping the former George Burns Theater property at Farmington and Plymouth Roads now used as a parking lot.

Phoenix Land has already completed its Dearborn West Village, with 76 condominiums and retail; and has several more urban redevelopments in the works.These include 110 townhomes and a Walgreens at Farmington and Six Mile Roads in Livonia; a 140,000 sq. ft. shopping center on Grand River between Eight Mile and Middlebelt Roads in Farmington Hills; as well as projects in the City of Detroit, Highland Park, and at an abandoned stamping plant in downtown Northville.

Industry insiders credit much of the progress being made in such in-fill redevelopment to Michigan's streamlined environmental laws

Southfield still strong The lessons of residence and community attractiveness aren't being lost in Southfield, which remains the metro area's largest individual office submarket, according to Barbara Bartos, Southfield Business Development manager.

Some examples of Southfield developments include: Oakland Commons, an office development by Southfield-based Redico, in which 90,000 sq. ft. of a planned 200,000 sq. ft. have been built; and Grand/Sakwa's Park Place at Town Center condominiums, in which 128 units of a planned 400-unit project have been built or are in progress. Both projects have been designed to make Southfield's Civic Center area more like a traditional city center, with mixed uses and pedestrian walkways between major properties.

Among other Southfield developments:

* The Kojaian Cos. will be remodeling and repositioning three Southfield office buildings, Travelers Tower I and II, and Raleigh Office Centre; and

* Pomeroy Investments will be similarly repositioning One Lahser Centre, Two Lahser Centre, Central Park Place, Central Place Plaza and Crescent Centre for a total of more than 420,000 sq. ft. of office space.

Hotel market heats up "With respect to the hospitality sector, last year was the year of the de-REIT," says Mike Blahosky, Grubb & Ellis' hospitality and investment sales broker. "In a sense, Wall Street's perception of REITs and REIT stocks was that they were good at acquiring companies and portfolios, but weren't good as operating units."

Companies will continue to purify portfolios and get rid of non-core assets, buy back stock or go private, says Blahosky.

On the other hand, it was a record year from a performance standpoint, says Blahosky. "Locally, we were the top market in the country for increase in average daily rate (ADR) for the first half of the year, at 14.5%."

The economy is robust and most suburban rooms are spoken for from Monday through Thursday. As a new terminal at Detroit Metropolitan Airport nears completion, more interest will be drawn to land in Romulus along I-94 and I-275, according to Blahosky.

With respect to hotel occupancies downtown, GM and Compuware should boost hotel demand, but Blahosky says it isn't clear yet how much hotel business the casinos and new baseball and football stadiums will generate.

Still, overall inventory is meager by big-city standards. For example, the recent conversion of the 280 rooms of the former Days Inn on Michigan Avenue to a Best Western is a significant development, for it means about a 10% boost in downtown rooms.

New multifamily product Within the apartment industry, two new platforms from Farmington Hills, Mich.-based Village Green Apartments represent, once again, a sensitivity to demographics and lifestyle choices among today's renter.

Village Green of Rochester, within walking distance of downtown Rochester will consist of 240 units, divided into clusters of 10, with an architecture that might be called Carriage House-style. The 240 units feature 14 different floorplans, demonstrating that today's upscale apartment customer wants variation, notes Terry Schwartz, president and COO of Village Green.

Similarly, at the 299-unit Regents Park in Troy, which is 30% pre-leased, according to Schwartz, the emphasis at this high-end apartment community has been on individual upgrades like carpets and appliances, making the experience "more like going into a home."